Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.5% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

To cut or not to cut?

Jan 28, 2020

Share

Forget the ‘wait-and-see’ mode of fellow central bankers and the equally dull ‘wait-and-see-on- Brexit’ mode, Mark Carney’s final interest rate decision as the Bank of England Governor is set to be one of the most compelling. Traders are equally divided about what will happen, with swaps markets pricing a 49% chance of a cut in rates to 0.5%. Whether the Governor wanted such uncertainty going into his final meeting is highly debatable…

Dovish cocktail feeds rate cut hopes

Rate cut expectations soared at the beginning of the year as Carney himself kicked off an avalanche of dovish MPC speak and weak economic data from the fourth quarter of last year. Figures showing the economy shrank in November and retail sales unexpectedly falling in December look to have sealed a move lower in rates as the chances of a 25bp move at its January meeting spiked from 5% to 72%. Notably, headline inflation came in at a three-year low at 1.3%, well short of the BoE’s 2% target, while the core measure nosedived to its lowest level since October 2016. Moreover, in contrast to 2018 when inflation also undershot its target, it appeared the BoE was not worried about a weaker sterling at this point.

‘Boris bounce’

All eyes moved to last week’s PMI data, which has since cooled expectations for a rate cut. The services index, accounting for around 80% of overall UK GDP, leapt to a sixteen-month high in January, while manufacturing moved sharply higher, even though it remains below 50 that denotes contraction. Recent jobs and wage growth data have also pointed to a relatively healthy labour market.

Of course, Brexit finally takes place on Friday so does this symbolic date dictate that the BoE hold off from any action due to the political signal it would send out? More importantly, we think the BoE does not yet know the full impact of the possible post-election rebound.

Heads or tails?

According to Saunders, one of the MPC members who voted for a rate cut at the last meeting, it would be wise to move swiftly and aggressively with a rate cut. The cost of waiting could be high; indeed, some analysts are calling for an ‘insurance’ cut – one and done – until the inevitable deliberations over the next Brexit stage and deadlines begin.

As we have written previously, we don’t think there is enough data to push the BoE into action. The MPC may also be watching the March 11 budget with some interest, ahead of the start of the new Governor Bailey’s term.

Market reaction

The front end is currently pricing around 12bps in cuts for this meeting, with a full 25bp cut priced around June. Profit taking in the short sterling curve has seen some push back since last week’s extreme pricing. GBP has been relatively steady, holding around 1.30, even as market pricing for a January cut have risen from effectively zero to 50% or so.

A sell-off in sterling seems inevitable in the event of a cut, but guidance will be crucial in determining whether this is a one-off move and not part of a sustained easing cycle. A convincing break of 1.2954 and then 1.2905 which act as firm support, may see a return to the October-December 1.28-1.30 range. Resistance stands at 1.3172 and 1.3284 above.

Subscribe to our newsletter

Follow us

Risk warning: Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.5% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Trading derivatives is risky. It isn't suitable for everyone and, in the case of Professional clients, you could lose substantially more than your initial investment. You don't own or have rights in the underlying assets. Past performance is no indication of future performance and tax laws are subject to change. The information on this website is general in nature and doesn't take into account your or your client's personal objectives, financial circumstances, or needs. Please read our legal documents and ensure you fully understand the risks before you make any trading decisions. We encourage you to seek independent advice.

Pepperstone Limited is a limited company registered in England & Wales under Company Number 08965105 and is authorised and regulated by the Financial Conduct Authority (Registration Number 684312). Registered office: 70 Gracechurch Street, London EC3V 0HR, United Kingdom.

The information on this site is not intended for residents of Belgium or the United States, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.